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District Court finds SEC acted in bad faith and orders it to pay defendant’s attorney fees partially
On March 18, the U.S. District Court in Utah ordered the SEC to pay a defendant’s attorney fees and legal costs partially after the Commission was found to have engaged in “gross abuse” and acted in bad faith on how it presented evidence as part of a temporary restraining order (TRO). Additionally, the court denied the SEC’s motion to dismiss the case without prejudice.
The SEC had filed suit against the defendant, a cryptocurrency company, for allegedly making false and misleading statements to investors, specifically how the company wished to move its assets to the United Arab Emirates in an online video to purportedly “evade law enforcement.” The court had agreed with the SEC and eventually froze the defendant’s assets. In reply, the defendants contended the SEC’s representations were “highly misleading” as they were in response to a viewer’s question posed in a comment as weighing the benefits of operating in the UAE compared to a U.S. regulatory environment. Despite the SEC “affirmatively and repeatedly” asserting that the defendants were moving funds and assets overseas, the court found no evidence to support that claim and had decided to grant the SEC a TRO because of these misrepresentations.
The court emphasized that it does not take its authority to issue TROs lightly, since this authority invokes extreme powers of the federal judiciary. The court now found the SEC made false statements, and despite having multiple opportunities to correct them, proceeded to make additional “layers of false statements” demonstrating “subjective bad faith.”
The court refused to write these issues off as mistakes. In its reply, the SEC stated that its attorneys made inaccurate statements, failed to correct them, and improperly labeled an inference as fact. The court acknowledged that the SEC’s attorneys “fell short” of the responsibility entrusted to it by Congress. On reply, the Commission “deeply regrets” its errors but argued it does not deserve any sanctions since it had not engaged in any “bad faith conduct.” The court disagreed, noting “companies were seized, assets were frozen, and lives were upended.”
Further, the SEC argued that sovereign immunity barred it from any monetary sanctions; the court disagreed. The court admonished the SEC: “[W]hen an attorney makes a false statement of material fact to a court, the lawyer is required to correct it.” The court found the SEC’s explanations unsatisfactory. It also denied the SEC’s motion to dismiss without prejudice. The court sided with the defendants eventually after they asserted the SEC sought to “evade” the court’s oversight. While weighing the decision to impose a greater sanction, the court decided against imposing fees and costs for the entire court case, but directed the Defendants to submit a fee request, if they would like. In all, the court found with “clear evidence” there was a “complete lack of color and an improper purpose on the part of the government.”
Trusts are covered persons subject to the CFPA, 3rd Circuit upholds CFPB FDCPA case
On March 19, the U.S. Court of Appeals for the Third Circuit filed an opinion remanding a case between the CFPB and defendant statutory trusts to the District Court. After issuing a civil investigative demand in 2014, the CFPB initiated an enforcement action in September 2017 against a collection of 15 Delaware statutory trusts that furnished over 800,000 private loans and their debt collector for, among other things, allegedly filing lawsuits against consumers for private student loan debt that they could not prove was owed or was outside the applicable statute of limitations (covered by InfoBytes here). Then, early last year, the parties settled and asked the court to enter a consent judgment, which was denied (covered by InfoBytes here).
The 3rd Circuit addressed two questions: (i) whether the trusts are covered persons subject to the CFPA; and (ii) whether the CFPB was required to ratify the underlying action that questioned a constitutional deficiency within the Bureau. On the statutory issue, the court found that the trusts fell within the purview of the CFPA because trusts “engage” in offering or providing a consumer financial product or service, specifically student loan servicing and debt collection, as explicitly stated in the trust agreements each trust entered. Regarding the constitutional question, the defendants argued that the Bureau needed to ratify the underlying suit because it was initiated while the agency head was improperly insulated, and since the Bureau ratified it after the statute of limitations had run, the suit was untimely. The court disagreed and found that the defendants’ analysis of the here-and-now injury “doesn’t go far enough,” therefore the CFPB did not need to ratify this action before the statute of limitations had run because the impermissible insulation provision does not, on its own, cause harm.
Bank regulators respond to bankers’ motion to enjoin CRA final rule
On March 8, the Fed, OCC, and FDIC (the federal banking agencies, or “FBAs”) submitted a brief opposing the plaintiffs’ motion for a preliminary injunction to stop the CRA final rule from going into effect. As previously covered by InfoBytes, a group of trade, banking, and business associations filed a class-action complaint for injunctive relief against the bank regulators’ enforcement of the final rule to implement the CRA before it goes into effect on April 1. The FBAs assert that, in opposing the final rule, the plaintiffs are asking the court to “graft” two exclusions from the CRA’s purpose that are not actually in the statute: first, to exclude geographic areas where a bank conducts retail lending from the scope of the bank’s “entire community”; and second, to exclude a bank’s deposit activities from the assessment on whether a bank is meeting its entire community’s “credit needs.” The banking regulators also argued that the plaintiffs’ motion for preliminary relief should fail because the plaintiffs cannot show irreparable harm, in that they have failed to demonstrate that costs to comply with the CRA final rule, which would not apply until 2026 and 2027, were significant when considered in the context of the bank’s overall finances. Finally, the FBAs argued that the public interest and balance of equities favor allowing the final rule to proceed, as, among other factors, “the rule provides significant regulatory relief and lower compliance costs for smaller institutions by increasing the asset size thresholds that determine which performance tests apply to an institution.”
Banking associations petition District Court for summary judgment against CFPB’s Final Rule on small business lending
On March 1, several banking associations (plaintiffs) petitioned a district court under a motion for summary judgment in an ongoing case against CFPB’s Final Rule in §1071, claiming that the Final Rule goes beyond the scope of the CFPB’s rulemaking authority. (For rule, see 88 Fed. Reg. 35150 from May 31, 2023). As previously covered by InfoBytes, the Court last ordered granting motions for a preliminary injunction against the CFPB and its small business loan rule. The rule expanded the number of data points to 81 so certain lenders––including women-owned, minority-owned, and small businesses––would be required to disclose to covered financial institutions. The plaintiffs argued that the Final Rule would be a “fruitless attempt to capture the complexity of small business lending” given the number of extraneous data fields and would not fulfill the underlying purpose of the rule set forth by ECOA. That purpose would be to “facilitate enforcement of fair lending laws and enable communities, government entities, and creditors to identify business and community development needs and opportunities for credit for women-owned, minority-owned, and small businesses.”
In their argument, the banking associations alleged that the CFPB had exceeded its statutory authority by requiring the extra data disclosures, that the data would not provide any tangible benefit, and that implementation of the rule is arbitrary and capricious as it ignores the significant costs that will be incurred by requiring lenders to provide such a large amount of extra information. The plaintiffs emphasized that while Congress granted the CFPB the power to add data points to information a lender might be expected to disclose, the CFPB exceeded its authority in adopting the Final Rule and that its only consequence “will be the imposition of a staggering compliance burden on lenders” and ultimately reduce opportunities for small businesses.
HUD sued for allegedly failing to refund mortgage insurance premiums for early-terminated FHA-insured mortgages
On March 12, a putative class action complaint was filed against the Department of Housing and Urban Development (HUD) for allegedly denying homeowners their Mortgage Insurance Premium (MIP) refunds upon the early termination of their FHA-insured mortgages. According to the complaint, HUD must refund unearned MIPs, but has refused to refund homeowners by creating “unnecessary bureaucratic hurdles.” The plaintiffs alleged that the OIG had confirmed “the validity of complaints regarding HUD’s handling of MIP refunds.”
Citing HUD regulations, the plaintiffs alleged that when an FHA mortgage is terminated early, within seven years of the purchase of the refinancing of the property, there is an overpayment of the MIP which should be refunded by HUD. According to the plaintiffs it is a “widespread practice” for HUD not to automatically refund MIPs, but instead require a burdensome, lengthy process which hindered the prompt refund of fees in multiple ways. The 2022 OIG report cited by plaintiffs allegedly found, among other things, that HUD did not have adequate controls in place to ensure that refunds were appropriately tracked, monitored, and issued. The plaintiffs alleged that Floridians are owed over $21.7 million in refunds.
The plaintiffs are seeking injunctive and declaratory relief and a return of all unfairly retained refunds “together with damages in the amount of the total earned interest and other investment monies accrued by Defendant with Plaintiff’s and Class Members’ monies.”
District Court sides with bank in class-action suit against foreign currency swap overcharges
On March 5, the U.S. District Court for the Eastern District of Virginia dismissed a purported class action complaint in which plaintiffs alleged the defendant banks used “fictional” foreign exchange rates that deviated from those incorporated into plaintiffs’ agreements with the defendants. Specifically, the plaintiffs asserted that defendants charged the plaintiffs “fictional” rates imposed by credit card companies, and in so doing, breached their relevant contracts with the plaintiffs and violated several state consumer protection laws.
In dismissing the complaint, the court concluded that although the plaintiffs had standing to sue, their breach of contract claim failed as a matter of law because the complaint failed to identify any specific promises regarding exchange rates in the relevant contracts, and a singular reference to credit card companies’ rules did not incorporate such rules into the relevant contracts. The court further rejected the plaintiffs’ argument that an agency relationship existed between the credit card companies and defendants, reasoning that the plaintiffs failed to plausibly demonstrate defendants had any ability to control the rates.
The court similarly dismissed all the plaintiffs’ consumer protection law claims, concluding that the relevant laws did not permit for a breach of contract to serve as the basis for an unfair or deceptive trade practice.
Alabama judge finds the Corporate Transparency Act unconstitutional, DOJ quickly appeals
On March 1, the federal district court in the Northern District of Alabama entered a final declaratory judgment concluding that the Corporate Transparency Act (CTA) is unconstitutional. The plaintiffs, including a non-profit small business association consisting of more than 60,000 small business members as well as an individual small business owner, sued the Treasury Department, Secretary Janet Yellen, and FinCEN Acting Director Himamauli Das in their official capacities, alleging that the CTA’s mandatory disclosure requirements violate the First, Fourth, Fifth, Ninth, and Tenth Amendments and exceed Congress’s authority under Article I of the Constitution.
Corporations, LLCs, or other similar entities that are either “(i) created by the filing of a document with a secretary of state… or (ii) formed under the law of a foreign country and registered to do business in the United States” are required to provide certain beneficial ownership information, as well as disclose any related changes to FinCEN under the CTA, excluding exempt entities. The CTA was passed in 2021 as part of the National Defense Authorization Act and required most entities incorporated under state law to disclose beneficial ownership information to FinCEN to prevent financial crimes often committed through shell corporations. In September 2022, FinCEN issued a final rule implementing the CTA, which went into effect on January 1 of this year, and required currently existing entities and five million new entities formed each year from 2025 to 2034 to disclose the identity and information of any “beneficial owner” to FinCEN (see Orrick Insight here).
According to the court, the CTA exceeds the Constitution’s limits on Congress’s power and does not have a strong enough connection to any of Congress’s listed powers to be considered a necessary or appropriate way to reach Congress’s policy objectives. The court rejected the government’s claims that the CTA is covered by various constitutional provisions, including the Commerce Clause, Taxing Clause, Necessary and Proper Clause, and Congress’s powers related to foreign affairs and national security.
The judgment permanently enjoined the Department of the Treasury and FinCEN from enforcing the CTA against the plaintiffs and as a result they are not required to report beneficial ownership information to FinCEN at this time. The order does not ban enforcement of the CTA and its beneficial ownership disclosure requirements to FinCEN generally.
On March 11, the U.S. Department of Justice filed a notice of appeal to the U.S. Court of Appeals for the Eleventh Circuit after U.S. District Judge Liles C. Burke’s March 1 ruling.
State Supreme Court vacates and remands TILA dispute
Recently, the Maine Supreme Judicial Court vacated a judgment in favor of a bank and remanded the decision to re-examine the nature of a loan and consider all relevant evidence to determine if the loan was for commercial purposes. The plaintiffs defaulted on a loan from the defendant, a bank, by securing the loan with a hunting cabin they owned, and a lease for the land on which they had built the cabin. The defendant successfully sued for recovery of the cabin. On appeal, the plaintiffs argued the bank failed to make the requisite disclosures under TILA and thus it was in error to decide in favor of the bank. The bank conceded that it did not make the required disclosures but countered that the credit transaction was not subject to TILA because the loan was for commercial purposes, and if the loan was secured by real property, it was not expected to be used as the principal dwelling of the consumer(s).
First, the court found that it was an error not to consider extrinsic evidence when determining the purpose of the loan because the Official Staff Interpretations of Regulation Z outline factors to be considered in such a determination, which should be given great deference. Moreover, it found that most federal courts applied a holistic approach in determining the purpose of the loan. Because the Business and Consumer Docket court in Maine did not consider any extrinsic evidence, it decided to remand. Second, the court held that the TILA exemption for “credit transactions, other than those in which a security interest is or will be acquired in real property, or in personal property used or expected to be used as the principal dwelling of the consumer . . . in which the total amount financed exceeds $50,000” was inapplicable. Although the loan was for $378,698, the loan was secured by a leasehold. According to the court, the leasehold was an interest in real property, and the language in the exemption referencing “principal dwelling” only modified “personal property” and not “real property.”
Business groups sue the CFPB over credit card late fee rule
On March 7, several business groups (plaintiffs) sued the CFPB rule in the U.S. District Court for the Northern District of Texas over its announced credit card late fee rule. As previously covered by InfoBytes, the Bureau’s new final rule limited most credit card late fees to $8, among other actions, and was met immediately with criticism from banks and legislators.
The plaintiffs’ complaint claimed the CFPB completed the rule hastily to implement a pledge made by President Biden around his State of the Union Address to reduce credit card late fees by 75 percent. The complaint further asserted the CFPB skipped necessary steps, made economic miscalculations, and otherwise breached the Administrative Procedure Act. As alleged, the Bureau likely understated “the volatility of card issuers’ cost-to-fee ratios pertaining to late fees” and improperly relied on data which does not allow for the recovery of a “reasonable and proportional” penalty fee. On the Bureau’s use of the Y-14M data, the complaint alleged the new rule ignored peer-reviewed studies and instead opted to base the rule on an internal study using confidential data that was not available for examination during the period allocated for public comment. The plaintiffs argued the final rule would incur “substantial compliance costs” by amending printed disclosures, using the cost-analysis provisions, and notifying consumers of changes in interest rates to recoup costs, among other problems. The complaint also cited TILA’s effective-date provisions and the Bureau’s embattled funding structure to support the argument that the final rule would cause irreparable harm.
Department of Energy discontinues crypto mining survey following a settlement agreement
On March 1, a cryptocurrency company (plaintiff) and the U.S. Department of Energy submitted a settlement agreement to the U.S. District Court for the Western District of Texas to discontinue an emergency crypto mining survey once approved by the Office of Management and Budget.
According to the settlement agreement, the Department of Energy initiated an emergency three-year collection of a Cryptocurrency Mining Facilities Survey in January, which the plaintiff claimed did not comply with various statutory and regulatory requirements for the emergency collection of information. Following the court’s approval of the plaintiff’s temporary restraining order, which protected plaintiffs from completing the survey issued by the Department of Energy and protected any information they may have already submitted, the Department of Energy discontinued its emergency collection, and said it will proceed through notice-and-comment procedures for approval of any collection of information covering such data. As a result of the discontinuation of the emergency collection request, no entity or person is required to respond to the survey.
As part of the settlement agreement, the Department of Energy will destroy any information it had already received from survey responses. In addition to a $2,199.45 payment for the plaintiffs’ litigation expenses, the Department of Energy also agreed to publish a new Federal Register notice of a proposed collection of information and withdraw its original notice.